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How to choose a stock for investment?

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You came to the stock market and decided that it was time to buy a couple of shares. But how to choose? There are many companies, and you are one. Let’s get it right.

How to choose a stock for investment?

For starters, you can choose the industry in which you would like to invest. This may be metallurgy, retail, the oil and gas sector, telecom, finance, fertilizers, construction, energy, IT. If you are already collecting an investment portfolio, then it is better to choose several sectors, and not one. So you can protect your investments if something goes wrong in one of the sectors of the economy.

If you have decided on this, then the circle has narrowed. Now is the time to decide which specific stock to buy. This means that you need to evaluate many companies by different criteria and choose which ones are better, more promising and more suitable for your goals. It will take time, but you will be sure that your money will work and bring income. There are a lot of criteria for choosing companies. We will focus on the most basic.

Financial condition

All companies that are traded on the exchange must report to their shareholders. What is happening with the company can be found in its financial statements. Companies publish them on their websites every quarter, that is, every three months, and an annual total.

From the reports you can find out how much the company earns, what debts it has, who owes it and how much, how much it sells, how much it spends on its production, to whom it sells, and so on. When you open the report, you are likely to be afraid of the number of incomprehensible lines that you see. The most basic things to pay attention to are revenue, net profit, EBITDA, capital. A prosperous company must earn profits, and its revenue, EBITDA, capital should grow.

Dividends

See if the company pays dividends. If so, how much. This information can be found in the company’s dividend policy. From there you will learn how often the company will pay you money from its profits and how much. We wrote more about what dividends and dividend policy are in article 10 of the main terms of the stock market.

You can also understand what income from payouts you can see by looking at the dividend yield. It shows how much money you get per share and how fair this is in relation to the price. This indicator is calculated as follows: the total dividend per share per year is divided by the share price and multiplied by 100. As a result, the dividend yield is also expressed as a percentage. The bigger it is, the better. Typically, the dividend yield of companies varies from 2% to 12%.

Liquidity

This is how quickly you can buy or sell a stock at a market price. Liquidity is high, medium and low. The higher the better. If liquidity is low, you may find yourself in a situation where you want to sell or buy a stock, but you cannot do it at a bargain price and you will have to give more money.

Typically, low-liquid stocks are stocks of the so-called “third tier” – small companies that have low trading volume, that is, investors on the stock exchange rarely buy and sell their stocks. The shares of the first echelon – or as they are also called “blue chips” – high liquidity. The most liquid stocks are usually included in stock indices

Upside potential

If you plan to make money not only on dividends, you should pay attention to the price of shares and their growth potential.

Forecasts on how much the stock can grow are usually made by investment houses and analysts. This is also called target price. This is the future value of the paper, to which the price will rise in a certain time. Most often measured as a percentage. For example, company X now costs 800 rubles. And its target price in half a year is 1000 rubles. This means that presumably the price may rise by 200 rubles. or 25% in six months.

Here you can mention volatility. This is how much the stock price changes over a certain period of time. For example, a company X stock has high volatility over the past year. This means that the price of the stock is constantly falling or rising again. If you are going to buy paper for a long time, this indicator is not so important for you. But if you plan to earn extra money on the difference in the price of buying and selling shares for a short period of time, then volatility will help you.

Business growth potential

You can understand how well the company’s business is going from reporting. And also – from the company’s strategy. These are the company’s plans for the coming year, three, five, or any number of years. Most often, the company talks about its intentions in presentations for investors. They can be found on the companies website.

In a strategy, a company usually writes how much it plans to increase profits, how much it intends to sell its products, how much it will invest in development, whether it will pay dividends, whether it will release a new product and much more.

For example, the company is not doing very well and the stock price has recently fallen. But at the end of the year, the company publishes its new strategy. It talks about how she plans to cope with difficulties and how she will develop and earn more money. This is a good sign.

Multipliers

And you can look at the animators. These are such indicators of company performance. They compare the different financial parameters that we mentioned in the first paragraph. With the help of multipliers, you can understand how objectively a company is evaluated on the stock exchange. That is, are its shares too expensive.

By multiples, investors often look for undervalued companies – those whose stocks are much cheaper on the stock exchange than they should. This usually happens when the company’s performance is good, but no one has noticed it yet.

Such undervalued companies buy in the expectation that in the future the price of their shares will rise. Other investors in the market will also understand how promising the company is and start buying its securities, which will increase their value. The main multipliers are P / E, DEBT / EBITDA, ROE, EV / EBITDA, P / BV.